Key Takeaways
- MCAs are legally classified as commercial transactions, not loans — this limits your consumer protections
- Factor rates and APR are not the same thing — always calculate the true annualized cost
- Confession of judgment clauses are enforceable in some states and allow asset seizure without notice
- Reconciliation clauses may entitle you to payment adjustments — but you have to assert them
What Is a Merchant Cash Advance?
A merchant cash advance (MCA) is a financial product where a company purchases a portion of your future business revenue at a discount. You receive a lump sum upfront, and the funder collects a fixed daily or weekly amount from your bank account until the purchased amount is recovered.
MCAs are not regulated as loans because they are structured as purchases of future receivables. This means usury laws, Truth in Lending Act disclosures, and other consumer protections typically do not apply.
How Does MCA Repayment Work?
Repayment happens through daily or weekly ACH debits from your business bank account. The amount is typically fixed — meaning the same dollar amount is withdrawn every business day regardless of whether your revenue went up or down.
Some contracts include a reconciliation clause that allows payment adjustment based on actual revenue. In practice, most funders do not voluntarily reduce payments. You or your attorney must formally request reconciliation.
What Is a Factor Rate?
Instead of an interest rate, MCAs use a factor rate — typically between 1.1 and 1.5. Multiply your advance amount by the factor rate to get your total repayment amount.
Example: $100,000 advance × 1.35 factor rate = $135,000 total repayment. That is $35,000 in fees regardless of how quickly you repay.
What Is a Confession of Judgment?
A confession of judgment (COJ) is a clause in many MCA contracts that allows the funder to obtain a court judgment against you — including freezing your bank accounts — without filing a lawsuit or giving you notice. You essentially pre-agree to lose any future legal dispute.
New York banned out-of-state COJs in 2019 (CPLR § 3218), but many funders still include them. If you signed a COJ and you are outside New York, an attorney may be able to challenge the judgment.
What Happens If I Default?
Default triggers a cascade of consequences:
- ACH block attempts: The funder may try to withdraw larger amounts or split withdrawals
- UCC lien enforcement: The funder can claim rights to your business assets
- Confession of judgment: If your contract includes a COJ, the funder may obtain a judgment and freeze your accounts
- Lawsuit: The funder may sue for breach of contract
- Personal guarantee: Your personal assets may be targeted
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Frequently Asked Questions
MCAs have minimal federal regulation because they are classified as commercial transactions, not loans. Some states — California, New York, Virginia, Utah — have enacted disclosure requirements. But there is no federal licensing requirement, no APR disclosure mandate, and no usury cap that applies to MCAs nationwide.
Yes, and this is called MCA stacking. It is one of the most dangerous financial situations a business can be in. Multiple daily withdrawals compound the cash flow problem and dramatically increase default risk.
Most MCA funders can approve and fund within 24–48 hours. Some same-day. The speed is the primary appeal — and the reason many business owners skip the due diligence that would reveal the true cost.
